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Deregistration of UK Limited: The Tax Consequences for German Businesses
The regional tax office Hannover, Germany recently published a decree regarding the German tax consequences of the deregistration of a Limited in the UK Companies House. Taxand's German member firm investigates the major content of this decree.
UK Private Company Limited
The UK private company limited by shares ("Limited") is a popular and common legal form of German business life, particularly due to its minimum share capital requirements. A Limited carrying on operative business in Germany often has either its administrative seat or a permanent establishment ("PE") inland. Moreover, a Limited is frequently used as the general partner of a German limited partnership (Limited & Co KG), whereby the Limited's business purpose generally comprises the assumption of KG's management. In this constellation, the Limited also often maintains its administrative seat (which generally corresponds to the Limited's place of management or a PE) in Germany, e.g. due to the economic necessity to make business decisions on-site.
The major content of this decree is as follows:
- A Limited duly formed in the UK can be deregistered according to UK Law in case the company no longer participates in the economic life. These requirements are deemed to be met, inter alia, in case the Limited does no longer duly meet its publication obligations or its obligations to duly pay its public charges. If the Limited is deregistered according to UK Law, it ceases to be a legal entity. However, a deregistered Limited continues to exist for German tax purposes as a taxable entity as long as it has to fulfill outstanding tax obligations and duties.
- The assets of the deregistered Limited which are located in Germany are attributed to a so-called residual company ("NewCo"). The German tax treatment of NewCo depends on whether it will be closed down or will continue its business activities subsequent to its deregistration in the UK.
In case NewCo terminates its business activities subsequent to its deregistration, it is still covered by the UK company statute (= the company statute of the Limited's country of forma-tion), and, therefore, is still treated as a corporate entity. Correspondingly, no consequences for German VAT purposes arise and no change in the responsible tax office occurs. However, from a legal perspective the following has to be noted: In case the management of the Limited has violated its duties vis-?-vis the company (e.g. if management could be blamed for the de-registration of the company in the UK Companies House), it is no longer authorised to represent the company from a German perspective. In this case, a special liquidator would have to be appointed.
In case NewCo continues to carry on its business activities in Germany, it is assumed that the shareholder(s) of the deregistered Limited pursue(s) a new business subsequent to the deregistration. According to German Law, this enterprise is treated as a partnership (i.e. general partnership) or sole proprietorship, respectively. The assets of the deregistered Limited which are situated inland in Germany are then deemed to be transferred to the new partnership / sole proprietorship upon the Limited's deregistration. Such transfer of assets would be treated for tax purposes as a so-called distribution in kind which results in a hidden profit distribution. At the shareholder level, the hidden profit distribution would lead to taxable investment income in the first place and to a subsequent contribution of the received assets to NewCo's business assets. For VAT purposes, the transfer would be treated as a non-taxable transfer of a business as a going concern.
Important note 1: According to its wording, it is unclear whether the scope of the decree is limited to Limiteds having their administrative seat in Germany, or to each Limited with a German PE. However, it has to be assumed that it is the tax authority's intention to cover each Limited with German PE, since there would be no apparent reason for a differentiation in tax treatment in this regard. This assessment from our side has also been orally confirmed by the author of the decree.
Important note 2: The decree of the regional tax office Hannover shall apply until provisions regarding the German tax treatment of the deregistration of a UK Limited are published at federal level.
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